Understanding Goodwill in Business Acquisitions
If you’re buying a business with an SBA loan, you’ll inevitably encounter the concept of goodwill — and it’s one of the most important factors that determines whether your deal gets funded, what terms you receive, and how your acquisition is structured.
In simple terms, goodwill is the difference between what you pay for a business and the fair market value of its tangible assets. It represents the intangible value of the business — its reputation, customer relationships, brand recognition, trained workforce, established systems, and earning potential above what the physical assets alone could generate.
For example, if you’re buying a business for $1,000,000 and the tangible assets (equipment, inventory, real estate) are worth $300,000, the remaining $700,000 is goodwill. That $700,000 represents the value of the business as a going concern — the fact that it has customers, cash flow, and an established operation.
At GoSBA Loans, we help borrowers navigate goodwill-heavy acquisitions every day. With 50+ lenders in our network and over $320M funded in 2025, we know how to structure deals with significant goodwill for SBA approval.
What Counts as Goodwill vs. Tangible Assets?
To understand why goodwill matters to lenders, you first need to understand the distinction between tangible and intangible assets in a business acquisition.
Tangible Assets
These are physical, quantifiable assets that have clear market value:
- Real estate: Commercial property owned by the business
- Equipment and machinery: Manufacturing equipment, vehicles, computers, tools
- Inventory: Raw materials, work-in-progress, finished goods
- Furniture and fixtures: Office furniture, store displays, leasehold improvements
- Accounts receivable: Money owed to the business by customers
- Cash and cash equivalents: Bank balances, short-term investments
Tangible assets can be appraised, insured, and — critically for lenders — sold to recover value if the business fails.
Intangible Assets (Goodwill)
These are non-physical assets that contribute to the business’s earning power:
- Customer base and relationships: Existing clients who provide recurring revenue
- Brand recognition and reputation: The value of being known and trusted in the market
- Trained workforce: Employees who know the business and can operate it effectively
- Proprietary processes and systems: Established operational workflows, software systems, and institutional knowledge
- Contracts and agreements: Ongoing service contracts, exclusive supplier agreements, licensing deals
- Intellectual property: Trademarks, patents, copyrights, trade secrets
- Location advantage: The value of a prime location (separate from the real estate itself)
- Going concern value: The simple fact that the business is operational and generating revenue
Why SBA Lenders Care About Goodwill
Lenders care deeply about the goodwill-to-asset ratio in a business acquisition for one fundamental reason: risk.
The Collateral Problem
When a lender finances a business acquisition, they want to know: If this loan defaults, how much can we recover?
- Tangible assets can be liquidated. Equipment can be sold. Real estate can be foreclosed upon. Inventory can be liquidated. These provide a safety net for the lender.
- Goodwill cannot be liquidated. If the business fails, the customer relationships evaporate, the brand value disappears, and the trained employees leave. The intangible value that justified the purchase price is gone.
This means that in a high-goodwill deal, the lender is essentially making a bet that the business will continue to perform — because if it doesn’t, there aren’t enough hard assets to recover the loan balance.
The Goodwill Spectrum
Different types of businesses fall at different points on the goodwill spectrum:
Low goodwill (asset-heavy) businesses:
- Manufacturing companies with expensive equipment
- Businesses that own their real estate
- Retail businesses with significant inventory
- Construction companies with vehicle and equipment fleets
High goodwill (asset-light) businesses:
- Professional service firms (accounting, law, consulting)
- Medical and dental practices
- Marketing agencies and creative firms
- Technology and software companies
- Online businesses and e-commerce brands
- Insurance agencies (customer book of business is nearly all goodwill)
A manufacturing company selling for $2M with $1.5M in equipment has 25% goodwill — lenders love this. A dental practice selling for $2M with $200K in equipment has 90% goodwill — lenders approach this more cautiously.
How Goodwill Affects Your SBA Loan Terms
The amount of goodwill in your deal directly impacts several aspects of your SBA loan:
Equity Injection Requirements
The standard SBA equity injection (down payment) for a business acquisition is 10%. However, some lenders may require a higher equity injection for high-goodwill deals — sometimes 15-20% — because the lack of hard asset collateral increases their risk exposure.
Seller Financing Requirements
For deals with significant goodwill, lenders frequently require the seller to carry a seller note — typically 10-20% of the purchase price on full standby (no payments for 2 years or until the SBA loan is paid to a certain level). This seller note serves two purposes:
- It demonstrates the seller’s confidence in the business’s continued performance
- It reduces the lender’s exposure by shifting some risk to the seller
Interest Rates and Loan Terms
SBA 7(a) loans have regulated maximum interest rates, so the rate itself may not change dramatically based on goodwill. However, lenders have some discretion within the SBA’s parameters, and a high-goodwill deal may result in:
- A rate at the higher end of the allowable range
- Shorter loan terms (7-10 years instead of the maximum 10-year term for business acquisitions)
- More restrictive loan covenants
Additional Collateral Requirements
Lenders may ask for additional collateral to offset the goodwill risk:
- Personal real estate: A lien on your home or other personal property
- Life insurance: A policy naming the lender as beneficiary, covering the loan balance
- Business assets: A blanket lien on all current and future business assets
How to Structure High-Goodwill Deals for SBA Approval
If you’re pursuing a business acquisition where goodwill represents a significant portion of the purchase price (60%+), here’s how to strengthen your application:
1. Justify the Valuation With Strong Cash Flow
The single most important factor in getting a high-goodwill deal approved is demonstrating that the business generates enough cash flow to comfortably service the debt. Lenders typically want to see a debt service coverage ratio (DSCR) of at least 1.25x — meaning the business’s cash flow is at least 125% of the annual loan payments.
For high-goodwill deals, having a DSCR of 1.4x or higher makes lenders significantly more comfortable.
2. Demonstrate Revenue Durability
Since goodwill represents intangible value, lenders need confidence that the intangible assets will retain their value under new ownership:
- Customer retention rates: Show that customers stick around year after year
- Recurring revenue: Contracts, subscriptions, and repeat purchase patterns
- Diversified customer base: No single customer representing more than 10-15% of revenue
- Stable or growing revenue trends: 3+ years of consistent or improving performance
3. Negotiate Seller Involvement Post-Closing
A seller who stays involved during the transition period signals to lenders that:
- The seller believes in the business’s continued success
- Customer and employee relationships will transfer smoothly
- Institutional knowledge won’t be lost
For high-goodwill deals, a 6-12 month seller transition is often expected by lenders.
4. Include Seller Financing
A seller note of 10-20% on standby is nearly standard for high-goodwill SBA acquisitions. If the seller refuses to carry any note, it can actually raise red flags — lenders may wonder why the seller isn’t willing to have skin in the game.
5. Prepare a Comprehensive Business Plan
Your business plan should specifically address:
- Why the goodwill is sustainable (customer loyalty, brand strength, market position)
- Your plan to maintain and grow the business’s intangible value
- Risk mitigation strategies for customer retention and revenue stability
- Realistic projections that don’t depend on aggressive growth assumptions
GoSBA provides every client with a free professional business plan and financial projections — a $2,500–$5,000 value. For high-goodwill deals, this is especially critical because the plan needs to make a compelling case for why the intangible value will persist under new ownership.
6. Allocate the Purchase Price Strategically
How you allocate the purchase price across different asset categories matters for both tax purposes and lender perception:
- Tangible assets: Equipment, inventory, and other physical assets at fair market value
- Identifiable intangible assets: Customer lists, non-compete agreements, trademarks, and proprietary processes (these can be amortized separately from goodwill)
- Goodwill: The residual amount after allocating to tangible and identifiable intangible assets
By properly identifying and valuing intangible assets separately from goodwill, you can reduce the “pure goodwill” number on paper. A customer list with documented retention rates, for example, is a more defensible intangible asset than generic goodwill.
Goodwill and the SBA 7(a) Program: What the Rules Say
The SBA’s Standard Operating Procedures (SOPs) don’t set a maximum goodwill percentage for loan approval. However, they do require lenders to:
- Assess the reasonableness of the purchase price based on a business valuation or other supportable methodology
- Evaluate the borrower’s ability to repay based on historical and projected cash flows
- Collateralize the loan to the maximum extent possible, though insufficient collateral alone is not grounds for denial
- Require equity injection of at least 10% for change of ownership transactions
The SBA gives individual lenders significant discretion in how they evaluate goodwill. This is why lender selection is so important — some lenders are comfortable with 80-90% goodwill deals if the cash flow and borrower profile are strong, while others won’t go above 50-60% goodwill.
Common Mistakes in High-Goodwill Deals
Avoid these pitfalls when pursuing a high-goodwill business acquisition:
- Overpaying based on potential rather than performance: Lenders underwrite based on historical cash flow, not your growth projections. If the current earnings don’t support the price, the deal won’t get financed.
- Ignoring customer concentration risk: A business worth $1M in goodwill is far less valuable if 40% of revenue comes from one client who could leave.
- Skipping the professional valuation: A credible third-party valuation is essential for justifying the purchase price to lenders, especially in high-goodwill deals.
- Neglecting transition planning: Without a solid plan for retaining customers, employees, and vendor relationships, the goodwill you’re paying for could evaporate post-closing.
- Applying to the wrong lenders: Sending a 85% goodwill deal to a lender that caps goodwill at 60% wastes everyone’s time.
How GoSBA Helps With High-Goodwill Acquisitions
High-goodwill deals require precision in structuring, a lender who understands intangible value, and a compelling application package. GoSBA delivers all three:
- 50+ lender network: We know each lender’s appetite for goodwill and match your deal accordingly. Some of our lender partners routinely finance 80-90% goodwill deals with the right borrower profile.
- Deal structuring expertise: We help you structure the purchase price allocation, seller financing, and equity injection to optimize your approval chances.
- Free business plan and projections: Our professional business plans ($2,500–$5,000 value) make the case for why the goodwill is durable and the investment is sound.
- $320M+ funded in 2025: We’ve successfully closed high-goodwill deals across every industry — service businesses, practices, agencies, tech companies, and more.
- Completely free for borrowers: Our service costs you nothing. We’re paid by the lender at closing, so our incentives are aligned with yours.
Get Your High-Goodwill Deal Funded
Goodwill doesn’t have to be a deal-killer. With the right structure, the right lender, and expert guidance, you can successfully finance a business acquisition even when goodwill represents the majority of the purchase price.
At GoSBA Loans, we specialize in matching borrowers with lenders who understand their specific deal structure. Whether your acquisition is 50% goodwill or 95% goodwill, we know how to present your deal for maximum approval probability.
Our service is 100% free. You get access to 50+ SBA lenders, a professional business plan and financial projections (a $2,500–$5,000 value), and expert guidance from consultation to closing.
→ Contact GoSBA Today for a Free Consultation ←
Don’t let goodwill concerns hold up your business acquisition. Reach out now and let’s discuss how to structure and finance your deal.
